When did I buy my land? Inland Revenue explains
Tax Alert - April 2017
Emma Marr and April Wong
A recently finalised Inland Revenue statement (in the form of a “Questions We’ve Been Asked” or QWBA) provides guidance on the time that land is considered to be acquired for tax purposes. It is important for all property owners to be aware of when Inland Revenue considers land to have been acquired, and in particular that the test is different if the 2-year bright-line rule applies to the property sale.
QB 17/02 Income Tax – Date of acquisition of land, and start date for 2-year bright line test (QWBA) updates the Commissioner’s previously published view in the February 2016 Tax Information Bulletin, which clarifies the date on which a person is treated as acquiring land under the general land taxing provisions in the Income Tax Act 2007 (ITA), and the different rule that applies under the 2-year bright-line test.
Broadly, a person may be taxed on a profit made from the sale of land for a range of reasons including that they acquired it with the intention of disposing of it, as part of a business in dealing in land, or if the land was disposed of within 10 years of acquisition in various circumstances. Those circumstances include that they or an associate dealt in land, was in the business of developing or subdividing land, carried on a building business, or carried out some kind of development or subdivision scheme at the time the land was acquired. A new rule that applied from 1 October 2015 also taxes gains made from the disposal of residential land if it is acquired and sold within two years (otherwise known as the “bright-line” test). The bright-line test does not apply to the landowner’s main home. For the purposes of the land taxing provisions, including the 2-year bright-line rule, it is necessary to identify when the land was acquired in order to determine if a gain arising from the disposal of the land is taxable.
The QWBA includes a useful table summarising the date on which land is acquired for both the general land taxing rules and the 2-year bright-line rule. For the purposes of the general land taxing rules , the date of acquisition will be the date that a person first has an interest in the land. This may be on the date that a binding sale and purchase agreement is entered into (even if the agreement is conditional), the date that an option to acquire land is exercised, or, when land is acquired from an associated person, the date the associated person acquired the land. Different starting dates may also apply for specific transactions such as transfers of relationship property, distributions on death, distributions from a trust, transfers of value from a company and gifts of property.
It is important to recognise that the 2-year bright-line test operates differently from the other land provisions. In most cases, the 2-year period for the bright-line test starts on the date that the land transfer is registered and the purchaser gets legal title. Where land is subdivided, the start date is the date that title for the undivided land is transferred. Variations on the rule apply when the transfer is a result of a relationship property settlement, the land is acquired subject to the completion of a development or subdivision, the interest is a lease converted into freehold title, or if no title is registered before it is disposed of.
In addition, Inland Revenue has changed their view on when someone is deemed to have their first interest in land in certain kinds of nominations. A nomination can take various forms. If the original purchaser is acting on behalf of the nominee (the person who subsequently purchases the property) then the nominee is treated as acquiring the land at the same time as the original purchaser. However, if prior to settlement, a person nominates another person to complete the purchase (often an associated person) and is not acting on their behalf, the original purchaser is not treated, for the purposes of the 2-year bright-line rule, as having acquired the land at all. Previously, Inland Revenue was of the view that any capital gain arising from such a nomination would be taxable under the bright-line rule. However, Inland Revenue have revised that view and now acknowledge that the nominator does not transfer their interest in the land; rather they create a new right for the nominee. Therefore on-selling the right to acquire the land does not give rise to a liability under the bright-line test. Another scenario is when a person assigns their contractual rights to purchase land, for example a person buys a property off the plans, and on-sells the property before it is completed. The 2-year period for the assignor will start on the date that that they entered into the sale and purchase agreement. For the assignee, the date of acquisition under the general land taxing provisions will be the date that they enter into a binding agreement to purchase the property, whereas for the purposes of the bright-line test the 2-year period will start on the date the transfer of title is registered to them.
April 2017 Tax Alert contents